25. Fabri Corporation is considering eliminating a department that has an annual contribution margin of $33,000 and $66,000 in annual fixed costs. Of the fixed costs, $16,500 cannot be avoided. The annual financial advantage (disadvantage) for the company of eliminating this department would be:
27.
The SP Corporation makes 34,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is:
| Direct materials | $ | 9.30 |
| Direct labor | $ | 8.30 |
| Variable manufacturing overhead | $ | 3.35 |
| Fixed manufacturing overhead | $ | 4.30 |
An outside supplier recently began producing a comparable motor that could be used in the sewing machine. The price offered to SP Corporation for this motor is $23.35. If SP Corporation decides not to make the motors, there would be no other use for the production facilities and none of the fixed manufacturing overhead cost could be avoided. Direct labor is a variable cost in this company. The annual financial advantage (disadvantage) for the company as a result of making the motors rather than buying them from the outside supplier would be:
A customer has requested that Lewelling Corporation fill a special order for 3,000 units of product S47 for $30 a unit. While the product would be modified slightly for the special order, product S47's normal unit product cost is $22.90:
| Direct materials | $ | 6.60 | |
| Direct labor | 4.00 | ||
| Variable manufacturing overhead | 3.70 | ||
| Fixed manufacturing overhead | 8.60 | ||
| Unit product cost | $ | 22.90 | |
Assume that direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product S47 that would increase the variable costs by $2.20 per unit and that would require an investment of $10,000.00 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:
25) Net income when department continue = 33000-66000 = -33000
Net income when department discontinue = -16500
Annual financial advantage when department eliminate = 33000-16500 = 16500
27) Differential analysis :
| Make | Buy | |
| Direct material | 316200 | |
| Direct labour | 282200 | |
| Variable manufacturing overhead | 113900 | |
| Purchase cost | 793900 | |
| Total | 712300 | 793900 |
Financing advantage = 793900-712300 = 81600
Incremental analysis :
| Incremental revenue (3000*30) | 90000 |
| Incremental cost | |
| Direct material (3000*6.6) | 19800 |
| Direct labour (3000*4) | 12000 |
| Variable manufacturing overhead (3000*3.7) | 11100 |
| Additional cost (3000*2.2) | 6600 |
| Special molds | 10000 |
| TOtal incremental cost | 59500 |
| Incremental profit (loss) | 30500 |
The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be: $30500
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